SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2001
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______
Commission file number: 0-23332
EFTC CORPORATION
(Exact name of registrant as specified in its charter)
COLORADO 84-0854616
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2501 WEST GRANDVIEW ROAD
PHOENIX, ARIZONA 85023
(Address of principal executive offices)
(602) 789-6600
(Issuer's telephone number)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. [X] YES [ ]No
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON EQUITY, AS OF THE LATEST PRACTICABLE DATE.
COMMON STOCK, PAR VALUE $0.01 48,243,632 SHARES
(Class of Common Stock) (Outstanding at October 31, 2001)
EFTC CORPORATION
FORM 10-Q
INDEX
PAGE
NUMBER(S)
---------
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
Consolidated Balance Sheets-
December 31, 2000 and September 30, 2001 3-4
Consolidated Statements of Operations-
For the Quarters and the Nine Months Ended
September 30, 2000 and 2001 5
Consolidated Statements of Cash Flows-
For the Nine Months Ended September 30, 2000
and 2001 6-7
Notes to Consolidated Financial Statements 8-13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General 14
Merger Agreement 14-15
Results of Operations 15-19
Impact of Recently Issued Accounting Standards 19-20
Liquidity and Capital Resources 21-22
Special Note Regarding Forward-looking Statements 22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 23
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 23
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 23
ITEM 5. OTHER INFORMATION 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 23
SIGNATURES 24
2
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS December 31, September 30,
2000 2001
---- ----
CURRENT ASSETS:
Cash and equivalents $ 43 $ 70
Trade receivables, net of allowance for doubtful
accounts of $1,671 and $2,805, respectively 42,270 24,070
Receivable from sale of assets 500 --
Inventories, net 82,220 66,068
Prepaid expenses and other 1,380 1,360
--------- ---------
Total Current Assets 126,413 91,568
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Leasehold improvements 4,249 5,877
Buildings and improvements 2,127 2,124
Manufacturing machinery and equipment 15,432 15,475
Furniture, computer equipment and software 13,149 16,030
--------- ---------
Total 34,957 39,506
Less accumulated depreciation and amortization (14,581) (18,043)
--------- ---------
Net Property, Plant and Equipment 20,376 21,463
--------- ---------
INTANGIBLE AND OTHER ASSETS:
Goodwill, net of accumulated amortization
of $1,025 and $1,226, respectively 6,997 6,796
Intellectual property, net of accumulated amortization
of $2,403 and $2,715, respectively 2,585 1,947
Debt issuance costs, net of accumulated amortization
of $811 and $468, respectively 2,470 467
Deposits and other 731 724
--------- ---------
Total Intangible and Other Assets 12,783 9,934
--------- ---------
$ 159,572 $ 122,965
========= =========
The Accompanying Notes Are an Integral Part of These
Consolidated Financial Statements.
3
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
LIABILITIES AND SHAREHOLDERS' EQUITY DECEMBER 31, SEPTEMBER 30,
2000 2001
---- ----
CURRENT LIABILITIES:
Accounts payable $ 39,944 $ 27,663
Outstanding checks in excess of cash balances 5,471 210
Accrued compensation and benefits 7,463 6,585
Other accrued liabilities 1,498 1,954
--------- ---------
Total Current Liabilities 54,376 36,412
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities:
Banks 28,559 --
Convertible Notes, including accrued interest 59,093 --
Related parties 3,000 --
Other 339 165
--------- ---------
Total Liabilities 145,367 36,577
--------- ---------
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value. Authorized 5,000,000 shares; issued and
outstanding 14,233 shares of Series B Convertible Preferred Stock
at December 31, 2000 14,683 --
Common stock, $.01 par value. Authorized 75,000,000 shares;
issued and outstanding 15,933,489 and 48,243,632 shares, respectively 159 482
Additional paid-in capital related to common stock 93,222 167,475
Settlement obligation to issue 910,000 shares of common stock 2,303 2,303
Deferred stock compensation cost (280) (224)
Accumulated deficit (95,882) (83,648)
--------- ---------
Total Shareholders' Equity 14,205 86,388
--------- ---------
$ 159,572 $ 122,965
========= =========
The Accompanying Notes Are an Integral Part of These
Consolidated Financial Statements.
4
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2000 2001 2000 2001
---- ---- ---- ----
NET SALES $ 86,281 $ 84,084 $ 225,751 $ 289,409
COST OF GOODS SOLD 80,514 74,922 218,950 259,164
------------ ------------ ------------ ------------
Gross profit 5,767 9,162 6,801 30,245
OPERATING COSTS AND EXPENSES:
Selling, general and administrative expenses 8,903 4,277 21,964 13,740
Recapitalization and merger transaction costs 424 117 5,303 1,113
Impairment of furniture, computer equipment
and software -- -- 1,662 --
Goodwill amortization 67 67 201 201
------------ ------------ ------------ ------------
Total operating costs and expenses 9,394 4,461 29,130 15,054
------------ ------------ ------------ ------------
Operating income (loss) (3,627) 4,701 (22,329) 15,191
OTHER INCOME (EXPENSE):
Interest expense (2,877) (135) (7,265) (3,310)
Gain (loss) on sale of assets 4 43 (6) 207
Gain (loss) on sale of division 4,357 -- 4,357 574
Other, net 14 16 (14) 23
------------ ------------ ------------ ------------
Income (loss) before income taxes (2,129) 4,625 (25,257) 12,685
INCOME TAX EXPENSE -- (146) -- (451)
------------ ------------ ------------ ------------
Net income (loss) $ (2,129) $ 4,479 $ (25,257) $ 12,234
============ ============ ============ ============
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDERS:
Basic $ (4,282) $ 4,479 $ (27,410) $ 11,684
============ ============ ============ ============
Diluted $ (4,282) $ 4,479 $ (27,410) $ 14,451
============ ============ ============ ============
EARNINGS (LOSS) PER SHARE:
Basic $ (0.27) $ 0.09 $ (1.75) $ 0.37
============ ============ ============ ============
Diluted $ (0.27) $ 0.09 $ (1.75) $ 0.30
============ ============ ============ ============
NUMBER OF SHARES USED FOR COMPUTATION:
Basic 15,590,000 49,145,000 15,686,000 31,417,000
============ ============ ============ ============
Diluted 15,590,000 49,147,000 15,686,000 48,495,000
============ ============ ============ ============
The Accompanying Notes Are an Integral Part of These
Consolidated Financial Statements.
5
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------
2000 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (25,257) $ 12,234
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 6,328 4,679
Amortization of debt issuance costs 743 368
Impairment of property, plant and equipment 1,662 1,153
Accrued interest on exchangeable and convertible notes 4,043 2,217
Provision for excess and obsolete inventories 4,821 4,184
Provision for doubtful accounts receivable 596 385
Loss (gain) on sale of assets 6 (207)
Loss (gain) on sale of division (4,357) (574)
Stock-based compensation and services expense 263 56
Changes in operating assets and liabilities, net
of effects of sale of business:
Decrease (increase) in:
Trade receivables (3,932) 17,815
Inventories (43,760) 11,968
Income taxes receivable 2,106 --
Prepaid expenses and other 1,786 27
Increase (decrease) in:
Accounts payable (5,443) (12,281)
Accrued compensation and benefits (362) (878)
Other accrued liabilities (6,478) 282
--------- ---------
Net cash provided (used) by operating activities (67,235) 41,428
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 12,846 1,495
Payment of commissions related to sale of business (500) --
Capital expenditures (5,075) (6,294)
--------- ---------
Net cash provided (used) by investing activities 7,271 (4,799)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 296,706 291,153
Principal payments on long-term debt (243,138) (322,712)
Payments for debt issuance costs (2,770) --
Increase (decrease) in outstanding checks in excess of cash balances 8,506 (5,261)
Proceeds from exercise of stock options -- 218
--------- ---------
Net cash provided (used) by financing activities 59,304 (36,602)
--------- ---------
Net increase (decrease) in cash and equivalents (660) 27
CASH AND EQUIVALENTS:
Beginning of period 716 43
--------- ---------
End of period $ 56 $ 70
========= =========
The Accompanying Notes Are an Integral Part of These
Consolidated Financial Statements.
6
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(DOLLARS IN THOUSANDS)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------
2000 2001
---- ----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 2,797 $ 801
======== ========
Cash received (paid) for income taxes $ 2,106 $ (171)
======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of 23,763,349 shares of common stock as a
result of conversion of Convertible Notes $ -- $ 61,309
======== ========
Issuance of 8,462,994 shares of common stock as a
result of conversion of Convertible Preferred Stock $ -- $ 15,233
======== ========
Issuance of 390,000 shares of common stock in
connection with lawsuit settlement obligation $ 987 $ --
======== ========
Obligation to issue common stock in lawsuit settlement $ 2,303 $ --
======== ========
Issuance of preferred stock for exchangeable notes,
net of debt issuance costs of $206 $ 14,207 $ --
======== ========
Stock options granted as deferred compensation $ 377 $ --
======== ========
Proceeds from sale of assets placed in escrow
account $ 500 $ --
======== ========
Issuance of warrants to purchase common stock
for debt issuance costs $ 326 $ --
======== ========
The Accompanying Notes Are an Integral Part of These
Consolidated Financial Statements.
7
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
Effective January 1, 2001, the Company changed its interim financial reporting
to end on the Sunday closest to the last day of each calendar quarter, except
for the fourth quarter of each year which will continue to end on December 31st.
The third quarter of 2001 ended on September 30, 2001. This change did not have
a material effect on the comparability between the first nine months and the
third quarter of fiscal 2000 and 2001.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and in conformity with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the quarter and the nine
months ended September 30, 2001 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2001. The unaudited
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2000.
2. EARNINGS PER SHARE
Basic Earnings Per Share excludes dilution for potential common shares and is
computed by dividing net income or loss applicable to common shareholders by the
weighted average number of common shares outstanding for the period. For the
computation of Basic Earnings Per Share, accrued dividends on preferred stock
were deducted to arrive at net income or loss applicable to common stockholders.
Diluted Earnings Per Share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. Basic and Diluted Earnings Per Share are the same for all
periods in 2000, as all potential common shares were antidilutive. For the nine
months ended September 30, 2001, Diluted Earnings Per Share gives effect to
shares issuable prior to the May 31, 2001 conversion of the Company's
Convertible Notes and Convertible Preferred Stock, using the if-converted
method. Under the if-converted method, it is assumed that conversion occurred at
the beginning of the period, and that the Company would not have been required
to incur interest and dividends on the Convertible Notes and Convertible
Preferred Stock, respectively.
Presented below is the calculation of Net Income Applicable to Common
Shareholders used in the calculation of Diluted Earnings Per Share for the
quarter and the nine months ended September 30, 2001:
QUARTER NINE MONTHS
------- -----------
Net income $ 4,479 $ 12,234
Interest on Convertible Debt -- 2,217
--------- ----------
Net Income Applicable to Common
Stockholders $ 4,479 $ 14,451
========= ==========
8
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Presented below is the calculation of the number of shares used in the
calculation of Diluted Earnings Per Share for the quarter and the nine months
ended September 30, 2001:
QUARTER NINE MONTHS
------- -----------
Basic Weighted Average Shares Outstanding 49,145,000 31,417,000
Shares related to Convertible Debt before
conversion -- 12,585,000
Shares related to Preferred Stock before
conversion -- 4,482,000
Options and warrants 2,000 11,000
---------- ----------
Number of Shares Used in Computation 49,147,000 48,495,000
========== ==========
Stock options and warrants for approximately 4,396,000 shares exercisable at
prices ranging from $2.59 per share to $14.31 per share were outstanding at
September 30, 2001 but were not included in the computation of Diluted Earnings
Per Share because the exercise price of the options and warrants was greater
than the average market price of the Company's common stock during the nine
months ended September 30, 2001. Stock options and warrants for approximately
5,034,000 shares exercisable at prices ranging from $2.32 per share to $14.31
per share were outstanding at September 30, 2001 but were not included in the
computation of Diluted Earnings Per Share because the exercise price of the
options and warrants was greater than the average market price of the Company's
common stock during the third quarter of 2001.
3. INVENTORIES
Inventories at December 31, 2000 and September 30, 2001 consist of the
following:
2000 2001
---- ----
Purchased parts and completed subassemblies $65,905 $52,490
Work-in-process 14,284 8,329
Finished goods 2,031 5,249
------- -------
$82,220 $66,068
======= =======
4. RESTRUCTURING AND SALE OF ASSETS
Beginning in the fourth quarter of 1998, the Company took actions to increase
capacity utilization through the closure of facilities and the sale of assets.
The aggregate operating results related to these locations, derived from the
Company's divisional accounting records (excluding corporate costs, interest and
income taxes), for the quarter and the nine months ended September 30, 2000 are
summarized as follows:
9
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE PERIOD ENDED
SEPTEMBER 30, 2000
------------------
QUARTER NINE MONTHS
------- -----------
Net sales $ -- $ 11,932
Cost of goods sold 27 14,011
-------- --------
Gross profit (loss) $ (27) $ (2,079)
======== ========
Selling, general and administrative
expenses $ (11) $ (812)
======== ========
Impairment of long-lived assets $ -- $ (250)
======== ========
Management estimates that approximately $8,000 of the net sales shown above for
the nine-month period relate to customers who agreed to transition the
manufacture of their products to other facilities operated by the Company.
Following is a description of each location that was impacted by a sale or
restructuring during the first nine months of 2000.
SALE OF TUCSON ASSETS. In December 1999, the Company commenced negotiations with
Honeywell International, Inc. for the sale of inventory and equipment at the
Company's leased facility in Tucson, Arizona. On February 17, 2000, these assets
were sold to Honeywell for a purchase price of $13,240.
SOUTHEAST OPERATIONS. In September 1999, the Company initiated a plan to
consolidate and close its Southeast Operations in Fort Lauderdale, Florida. In
connection with the restructuring, the Company recognized a charge of
approximately $700 for severance costs related to approximately 200 employees
who were terminated in the second quarter of 2000. During the first quarter of
2000, the Company recognized charges totaling $950 for retention bonuses,
relocation costs and other closure activities. During the second quarter of
2000, the Company recognized additional charges of $1,186 related to operations,
impairment of equipment and final closure activities. The closure was
substantially complete by the end of the second quarter of 2000 and all
severance and retention costs were paid as of September 30, 2000.
5. HEADQUARTERS RELOCATION AND CHANGE IN ESTIMATES
In July 2000, the Company announced plans to relocate its corporate headquarters
from Denver to Phoenix. During the second quarter of 2000, management assessed
the estimated useful lives of the assets located in Denver and determined that
it was not practical to utilize certain assets at the Phoenix location. In June
2000, the Company also evaluated the carrying value of intellectual property
related to a customer whose business was transitioned to a new location. The
aggregate carrying value of the Denver assets and the intellectual property as
of March 31, 2000 was $2,133. Accordingly, during the second quarter of 2000 the
estimated useful lives of these assets were shortened to coincide with the
expected period that the assets will continue to be used in the business. This
change in estimate resulted in an increase in depreciation and amortization
expense of $711 ($.05 per share) during the third quarter of 2000, and $1,422
($.09 per share) for the nine months ended September 30, 2000.
In connection with the Denver headquarters relocation and other changes in
management, during the second and third quarters of 2000 the Company incurred an
aggregate of $3,090 for severance, moving costs, and recruiting fees for new
management and employees.
10
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. DEBT FINANCING
At December 31, 2000 and September 30, 2001, long-term debt consisted
of the following:
2000 2001
---- ----
Senior Subordinated Convertible Notes,
interest at 8.875%, due June 2006 $59,093 $ --
Note payable to director, interest at 10%,
unsecured, due March 2004 3,000 --
Note payable to bank under revolving line of
credit, interest at the prime rate plus .5%
(6.0% at September 30, 2001), collateralized
by substantially all assets, due March 2003 28,559 --
------- -------
Total long-term debt $90,652 $ --
======= =======
In connection with the signing of the Merger Agreement discussed in Note 7, on
May 31, 2001, the Senior Subordinated Convertible Notes with an aggregate
principal and accrued interest balance of $61,309 were converted to 23,763,349
shares of the Company's common stock. Unamortized debt issuance costs of $1,635
related to the Notes were charged to additional paid-in capital in connection
with the conversion. In June 2001, the Company repaid the $3,000 note payable to
one of its directors.
7. MERGER AGREEMENT
On May 2, 2001, the Company; K*TEC Electronics Holding Corporation, formerly
known as K*TEC Electronics Corporation ("K*TEC"); Thayer-Blum Funding II, L.L.C.
("TBF II"); and Suntek Corporation, formerly known as Express EMS Corporation
("Suntek"), a newly formed wholly owned subsidiary of the Company, entered into
an Agreement and Plan of Merger (the "Merger Agreement"), providing for, among
other things, the merger of one wholly owned subsidiary of Suntek with and into
the Company (the "EFTC Merger") and the merger of one wholly owned subsidiary of
Suntek with and into K*TEC (the "K*TEC Merger"). K*TEC is a privately held
electronic manufacturing services company based in Sugar Land, Texas. K*TEC is
100% owned by TBF II, an affiliate of Thayer-BLUM Funding L.L.C. ("TBF"), the
Company's principal shareholder. TBF currently controls approximately 78% of the
outstanding voting stock of the Company. A special committee comprised of the
Company's independent directors negotiated the terms of the Merger Agreement on
behalf of the minority shareholders of the Company.
On May 3, 2001, the parties to the Merger Agreement agreed to substitute TBF II
as a party to the K*TEC Merger. Such substitution is reflected in the Amended
and Restated Agreement and Plan of Merger dated as of May 3, 2001 by and among
the Company, K*TEC, TBF II and Parent (the "Amended and Restated Merger
Agreement").
11
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In connection with the signing of the Merger Agreement, the Company entered into
a stockholder agreement, as amended (the "Stockholder Agreement"), with TBF, TBF
II and Suntek that required TBF to convert the Senior Subordinated Convertible
Notes and the Series B preferred stock of the Company held by TBF into common
stock on or before May 31, 2001. These conversions resulted in the issuance of
approximately 32.2 million additional shares of common stock to TBF, which
increased its voting control of the Company from 58% to approximately 78%.
Pursuant to the Stockholder Agreement, TBF agreed to vote all of its shares of
the Company's common stock in favor of the business combination.
Pursuant to the Amended and Restated Merger Agreement, Suntek is required to
form two new wholly owned subsidiaries, which will merge with and into EFTC and
TBF II, respectively. Following completion of the transactions, the Company and
TBF II will be wholly owned subsidiaries of Suntek, whose common stock is
expected to be traded on the Nasdaq National Market under the trading symbol
"SNTX". Based upon the Amended and Restated Merger Agreement's exchange ratios,
it is expected that the owner of TBF II will receive approximately 56% of
Suntek's capital stock, while the Company's current shareholders (including TBF)
will receive approximately 44% of the shares. Following consummation of the
proposed business combination, TBF and its affiliates are expected to own
approximately 90% of the outstanding capital stock of Suntek.
Consummation of the proposed business combination is subject to a number of
closing conditions. Consequently, there can be no assurance that the business
combination will be consummated. If the merger is consummated, management
expects that it will be accounted for as a reorganization of entities under
common control.
During the second and third quarters of 2001, the Company incurred transaction
costs of $996 and $117, respectively, related to the proposed merger, primarily
related to a fairness opinion and professional fees. Since the merger will be
accounted for as a reorganization of entities under common control, the
transactions costs are required to be charged to operations in the period
incurred.
8. NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
No. 141, Business Combinations and Statement No. 142, Goodwill and Other
Intangible Assets. Statement No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Statement 141 also specifies criteria that intangible assets acquired in a
business combination must meet to be recognized and reported apart from
goodwill. Statement No. 142 addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. This Statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements.
The provisions of Statement No. 141 apply to all business combinations initiated
after June 30, 2001. The provisions also apply to all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001 or later. The provisions of Statement No. 142 are required to be
adopted by the Company beginning in the first quarter of 2002. Goodwill and
intangible assets
12
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
acquired after June 30, 2001, would be subject to the amortization provisions of
this Statement immediately.
The effect of these Statements on the Company will be the elimination of EFTC's
current 30-year straight-line amortization of goodwill and the requirement to
begin testing goodwill and other intangible assets for impairment at least on an
annual basis. Because of the extensive effort needed to comply with the adoption
of Statements 141 and 142, it is not currently practicable to estimate the
impact of adopting these Statements on the Company's consolidated financial
statements, including whether any transitional impairment losses will be
required to be recognized. If such losses are required to be recognized upon the
initial application of these Statements, they would be accounted for as the
cumulative effect of a change in accounting principle.
In August 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations. This standard requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. This standard is
effective for fiscal years beginning after June 15, 2002, with earlier
application encouraged. Management does not believe the initial application of
Statement 143 will have a significant impact on the Company's consolidated
financial statements.
In October 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which replaces FASB Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. The accounting model for long-lived assets to be
disposed of by sale applies to all long-lived assets, including discontinued
operations, and replaces the provisions of APB Opinion No. 30, Reporting Results
of Operations-Reporting the Effects of Disposal of a Segment of a Business, for
the disposal of segments of a business. Statement 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that have not yet
occurred. Statement 144 also broadens the reporting of discontinued operations
to include all components of an entity with operations that can be distinguished
from the rest of the entity and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. The provisions of Statement
144 are effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, are to be applied prospectively.
Management does not believe the initial application of Statement 144 will have a
significant impact on the Company's consolidated financial statements.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of our financial condition and results
of operations should be read in conjunction with our consolidated financial
statements and the related notes, and the other financial information included
in this Quarterly Report on Form 10-Q. This discussion and analysis contains
forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from those anticipated in these forward-looking
statements as a result of specified factors, including those set forth in the
section below entitled "Special Note Regarding Forward-Looking Statements" and
elsewhere in this Quarterly Report on Form 10-Q.
GENERAL
We are a provider of electronic manufacturing services to original
equipment manufacturers. We focus on high-mix solutions that target the
aerospace, industrial controls and instrumentation, medical equipment,
semiconductor capital equipment, networking and telecommunications equipment
industries. Our manufacturing services consist of assembling complex printed
circuit boards (using both surface mount and pin-through-hole technologies),
cables, electro-mechanical devices and complete "box-build" products. High-mix
manufacturing involves processing printed circuit board assemblies in small-lots
(up to 100 assemblies per production run) in a flexible manufacturing
environment.
The following discussion and analysis provides information that we believe
is relevant to an assessment and understanding of our results of operations and
financial condition. This discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere herein,
as well as with the consolidated financial statements, notes thereto and the
related management's discussion and analysis of financial condition and results
of operations included in our Annual Report on Form 10-K, as amended, for the
year ended December 31, 2000.
MERGER AGREEMENT
As discussed in Note 7 to the Financial Statements included in Item 1 of
this Report, in May 2001 we signed a definitive merger agreement with K*TEC
Electronics Holding Corporation, an electronic manufacturing services company
based in Sugar Land, Texas. K*Tec is controlled by an affiliate of Thayer-BLUM
Funding, L.L.C., our principal shareholder. A special committee comprised of our
independent directors negotiated the terms of the merger agreement on behalf of
our minority shareholders.
Following completion of the transaction, EFTC and K*TEC will be wholly
owned subsidiaries of Suntek Corporation, a newly formed holding company whose
common stock is expected to be traded on the Nasdaq National Market under the
trading symbol "SNTX". In connection with the signing of the merger agreement,
Thayer-BLUM Funding, L.L.C. converted the Series B preferred stock and the
Senior Subordinated Convertible Notes into shares of our common stock in May
2001.
Our current directors will serve as the directors of Suntek following the
merger. Consummation of the proposed business combination is subject to a number
of closing conditions. Consequently, there can be no assurance that the business
combination will be
14
consummated. If the merger is consummated, management expects that it will be
accounted for as a reorganization of entities under common control. For more
information regarding the proposed combination, see our proxy statement, which
is included in the Registration Statement on Form S-4 filed by Suntek with the
Securities and Exchange Commission.
RESULTS OF OPERATIONS
Our results of operations are affected by several factors, primarily the
level and timing of customer orders (especially orders from Honeywell). The
level and timing of orders placed by a customer vary due to the customer's
attempts to balance its inventory, changes in the customer's manufacturing
strategy, and variation in demand for its products due to, among other things,
product life cycles, competitive conditions and general economic conditions. In
the past, changes in orders from customers have had a significant effect on our
quarterly results of operations. Other factors affecting our quarterly results
of operations may include, among other things, our performance under the
agreement with Honeywell, price competition, disposition of divisions and
closure of operating units, our ability to obtain inventory from our suppliers
on a timely basis, our level of experience in manufacturing a particular
product, the degree of automation used in the assembly process, the efficiencies
we achieve through managing inventories and other assets, the timing of
expenditures in anticipation of increased sales, and fluctuations in the cost of
components or labor.
The following table sets forth certain operating data as a percentage of
net sales:
QUARTER ENDED NINE MONTHS ENDED
------------- -----------------
SEPTEMBER 30: SEPTEMBER 30:
------------- -------------
2000 2001 2000 2001
------ ------ ------ ------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 93.3% 89.1% 97.0% 89.6%
------ ------ ------ ------
Gross profit 6.7% 10.9% 3.0% 10.4%
Selling, general and
administrative 10.3% 5.1% 9.7% 4.7%
Recapitalization and merger
costs 0.5% 0.1% 2.4% 0.4%
Impairment of furniture,
computer equipment and software -- -- 0.7% --
Goodwill amortization 0.1% 0.1% 0.1% 0.1%
------ ------ ------ ------
Operating income (loss) (4.2%) 5.6% (9.9%) 5.2%
====== ====== ====== ======
QUARTER ENDED SEPTEMBER 30, 2000 COMPARED TO QUARTER ENDED SEPTEMBER 30,
2001
Net Sales. Net sales decreased $2.2 million, or 2.5%, from $86.3 million
for the quarter ended September 30, 2000 to $84.1 million for the quarter ended
September 30, 2001. Approximately 55% of our net sales for the third quarter of
2000 related to manufacturing services for Honeywell at our Phoenix plant,
compared to approximately 58% for the third quarter of 2001. Despite the
increase in sales to Honeywell in the third quarter of 2001, sales to other
customers were lower, primarily due the general economic slowdown. For the third
quarter of 2001, sales to Honeywell accounted for 85% of our consolidated net
sales.
We estimate that net sales for the fourth quarter of 2001 may decline up
to approximately 40% sequentially from net sales for the third quarter of 2001,
due to overall order softness from our existing customers. We are not able to
provide guidance beyond the fourth quarter of 2001 due to the uncertainty in the
markets served by many of our customers.
15
Gross Profit. Our gross profit increased by $3.4 million from a gross
profit of $5.8 million in the third quarter of 2000 to a gross profit of $9.2
million in the third quarter of 2001. Similarly, gross profit as a percentage of
net sales improved from 6.7% of net sales in the third quarter of 2000 to 10.9%
of net sales in the third quarter of 2001. The improvement in gross profit
during the third quarter of 2001 is primarily attributable to an overall
improvement in operational efficiency and more favorable product mix with our
customers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG & A") decreased $4.6 million, or 52.0%, from $8.9
million in the third quarter of 2000 to $4.3 million in the third quarter of
2001. SG & A expenses for the quarter ended September 30, 2000 included $1.5
million for consulting services intended to accelerate operational improvement
at each of our facilities. Additionally, SG & A expenses for the third quarter
of 2000 include a charge of $0.7 million for accelerated depreciation and
amortization of assets that were not expected to be utilized after the 2000
relocation of our corporate headquarters to Phoenix. We also recognized charges
of $1.3 million for severance, recruiting and other costs associated with
changes in management during the third quarter of 2000.
After excluding all of the charges discussed above, SG & A expenses
decreased $1.1 million from $5.4 million for the third quarter of 2000 to $4.3
million in the third quarter of 2001. This decrease in SG & A is primarily
attributable to a decrease in costs related to the relocation of our corporate
headquarters to Phoenix.
Recapitalization and Merger Transaction Costs. During 2001, we incurred
costs, primarily for professional fees, of $0.1 million related to our proposed
combination with K*TEC. If this combination is consummated, it will be accounted
for as a reorganization of entities under common control and, accordingly, these
costs were charged to operations in the third quarter. During 2000, we incurred
costs of $0.4 million related to the August 2000 Special Shareholders Meeting
for the approval of the recapitalization by Thayer-BLUM Funding L.L.C.
Interest Expense. Interest expense decreased $2.8 million, or 95.3%, from
$2.9 million in the third quarter of 2000 to $0.1 million in the third quarter
of 2001. Our weighted average borrowings have decreased from $90.8 million for
the third quarter of 2000 to $0.5 million for the third quarter of 2001. The
decreased debt level in 2001 was primarily due to the conversion of $61.3
million of debt to common stock on May 31, 2001. The reduction in debt was also
attributable to improved working capital management during 2001.
Lower interest rates in 2001 also contributed to the reduction in interest
expense. The interest rate on the $54 million of Exchangeable Notes that were
outstanding during the third quarter of 2000 accrued interest at 15% compared to
the reduced rate of 8.875% that went into effect after the recapitalization was
approved by our shareholders in August 2000. Additionally, the prime rate has
decreased by 1.25 percentage points during the third quarter of 2001, and this
also had a favorable impact because the interest rate on the revolving line of
credit is a variable rate based on the prime rate.
Income Taxes. Due to significant net losses in 1999 and 2000, we have
recorded a valuation allowance for all of our net deferred tax assets.
Utilization of our net operating loss carryforwards is subject to limitation as
a result of the change in ownership of our company that occurred during 2000.
Accordingly, if we continue to generate taxable earnings in future periods,
16
these net operating losses may not be sufficient to eliminate our entire current
income tax liability.
Based on the increased level of earnings generated in the third quarter of
2001, we determined that an income tax provision of $0.1 million should be
recognized. This provision was due to a valuation allowance for Federal
alternative minimum tax and a provision for state income taxes at locations
where the state net operating loss carryovers were not sufficient to offset
expected taxable income for 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2001
Net Sales. Net sales increased $63.7 million, or 28.2%, from $225.8
million for the first nine months of 2000 to $289.4 million for the first nine
months of 2001. Approximately 48% of our net sales for the first nine months of
2000 related to manufacturing services for Honeywell at our Phoenix plant,
compared to approximately 60% for the first nine months of 2001. All of the
increase in net sales during the first nine months of 2001 was attributable to
increased sales to Honeywell at our Phoenix plant. For the first nine months of
2001, the overall concentration of business with Honeywell accounted for 82% of
our consolidated net sales.
We estimate that net sales for the fourth quarter of 2001 may decline up
to 40% sequentially from net sales for the third quarter of 2001, due to overall
order softness from our existing customers. We are not able to provide guidance
beyond the fourth quarter of 2001 due to the uncertainty in the markets served
by many of our customers.
Gross Profit. Our gross profit increased $23.4 million from $6.8 million
for the first nine months of 2000 compared to $30.2 million for the first nine
months of 2001. Similarly, gross profit as a percentage of net sales improved
from 3.0% of net sales in the first nine months of 2000 to 10.4% of net sales in
the first nine months of 2001. The improvement in gross profit during the first
nine months of 2001 is primarily attributable to an overall improvement in
capacity utilization and operational efficiency at our facilities, and more
favorable product mix with our customers. The improvement in capacity
utilization was driven by changes initiated in 1999 and the first nine months of
2000, including the closure of our Ft. Lauderdale facility and the sale of the
assets of our Tucson facility. The Ft. Lauderdale and Tucson facilities
generated a combined gross profit deficiency of $2.1 million during the first
nine months of 2000. Gross profit for the first nine months of 2000 was also
negatively impacted by $0.8 million related to the transition of additional
manufacturing services under the Honeywell agreement in the first quarter of
2000.
During the first nine months of 2001, we assessed certain long-lived
assets for impairment related to the planned move to a new facility in the
Northeast, and the abandonment of manufacturing-related software that is no
longer expected to be used. Due to changes in our customers and product mix, we
also assessed the carrying value of intellectual property and manufacturing
equipment related to those customers during the first nine months of 2001.
Accordingly, we recognized impairment expense of $1.2 million that is included
in our cost of goods sold in 2001.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG & A") decreased $8.3 million, or 37.4%, from $22.0
million for the nine months ended September 30, 2000 to $13.7 million for the
first nine months of 2001. SG & A expenses
17
for the first nine months of 2000 included $3.0 million for consulting services
intended to accelerate operational improvement at each of our facilities. SG & A
for the first nine months of 2000 also included a charge of $1.4 million for
accelerated depreciation and amortization of assets that were not expected to be
utilized after the 2000 relocation of our corporate headquarters to Phoenix. We
also recognized charges of $3.1 million for severance, recruiting and other
costs associated with changes in management during the first nine months of
2000. Finally, the results for the first nine months of 2000 include $0.8
million for SG & A at divisions that were sold or closed by the end of September
2000.
After excluding all of the charges discussed above, SG & A expense
amounted to $13.7 million for the first nine months of 2000 and 2001. Despite
the significant increase in sales, SG & A expenses have remained stable,
primarily due to the elimination of costs as a result of the closure of the
Denver headquarters in the fourth quarter of 2000.
Impairment of Long-lived Assets. During the first nine months of 2000, we
recognized an impairment charge of $1.7 million, including $1.3 million for
software that we decided to abandon.
Recapitalization and Merger Transaction Costs. In connection with the
March 2000 recapitalization, we incurred charges totaling $5.3 million for
financial advisor fees, a fee paid to Thayer-BLUM Funding, costs related to a
Special Shareholder Meeting to approve the recapitalization, and due diligence
costs for legal, accounting and management consultants. We capitalized costs
associated with the Senior Subordinated Exchangeable Notes and the new revolving
credit agreement, and all other costs were charged to operations during the
first nine months of 2000.
In the first nine months of 2001, we incurred costs, primarily for a
fairness opinion and professional fees, of $1.1 million related to the proposed
combination with K*TEC. If this combination is consummated, it will be accounted
for as a reorganization of entities under common control and, accordingly, these
costs were charged to operations in the first nine months of 2001.
Interest Expense. Interest expense decreased $4.0 million, or 54.4%, from
$7.3 million for the first nine months of 2000 to $3.3 million in the first nine
months of 2001. Our outstanding debt decreased from $86.5 million at September
30, 2000 to none at September 30, 2001. The decreased debt level at September
30, 2001 was primarily due to the conversion of $61.3 million of debt to common
stock on May 31, 2001. The reduction in debt was also attributable to improved
working capital management during the first nine months of 2001, which resulted
in the repayment of nearly $29 million of debt under our revolving credit
agreement and a $3 million note payable owed to a director.
Lower interest rates in 2001 also contributed to the reduction in interest
expense. The interest rate on the $54 million of Exchangeable Notes that were
outstanding during the second and third quarters of 2000 accrued interest at 15%
compared to the reduced rate of 8.875% that went into effect after the
recapitalization was approved by our shareholders in August 2000. Additionally,
the prime rate has decreased by four percentage points during the first nine
months of 2001, and this also had a favorable impact because the interest rate
on the revolving line of credit is a variable rate based on the prime rate.
18
Gain (Loss) on Sale of Assets. During 1999, the Company recognized a loss
of $20.6 million in connection with the sale of substantially all of the assets
of the Services Division. The 1999 loss gave effect to the deferral of $2.5
million of the proceeds for a post closing Earn-Out Contingency. During 2000,
the purchaser agreed to pay $1.9 million under the Earn-Out Contingency
provision of the sales agreement. Accordingly, the Company recognized a gain of
$4.4 million in the first nine months of 2000, consisting of $2.5 million of the
1999 proceeds that the Company was entitled to retain and the additional
consideration of $1.9 million that the purchaser agreed to pay. However, in the
fourth quarter of 2000 we notified the purchaser that we believed we were
entitled to a higher payment than the $1.9 million that they calculated.
In April 2001, we entered into a settlement agreement with respect to the
earn-out calculation and, as a result of this agreement, we received a final
payment of $0.6 million that accounted for the $0.6 million gain on sale of
division in 2001. During the first nine months of 2001, we also recognized a
gain of $0.2 million from the sale of equipment.
Income Taxes. Due to significant net losses in 1999 and 2000, we have
recorded a valuation allowance for all of our net deferred tax assets. Based on
the level of earnings generated through the third quarter of 2001, we determined
that an income tax provision of $0.5 million should be recognized. This
provision was due to a valuation allowance for Federal alternative minimum tax
and a provision for state income taxes at locations where the state net
operating loss carryovers were not sufficient to offset expected taxable income
for 2001. Utilization of the Company's net operating loss carryovers is subject
to limitation as a result of the change in ownership of the Company that
occurred during 2000.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued Statement
No. 141, Business Combinations and Statement No. 142, Goodwill and Other
Intangible Assets. Statement No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30,
2001. Statement 141 also specifies criteria that intangible assets acquired
in a business combination must meet to be recognized and reported apart from
goodwill. Statement No. 142 addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon
their acquisition. This Statement also addresses how goodwill and other
intangible assets should be accounted for after they have been initially
recognized in the financial statements.
The provisions of Statement No. 141 apply to all business combinations
initiated after June 30, 2001. The provisions also apply to all business
combinations accounted for using the purchase method for which the date of
acquisition is July 1, 2001 or later. The provisions of Statement No. 142 are
required to be adopted by us beginning in the first quarter of 2002. Goodwill
and intangible assets acquired after June 30, 2001, would be subject to the
amortization provisions of this Statement immediately.
The effect of these Statements on the Company will be the elimination of
EFTC's current 30-year straight-line amortization of goodwill and the
requirement to begin testing goodwill and other intangible assets for impairment
at least on an annual basis. Because of the extensive effort needed to comply
with the adoption of Statements 141 and 142, it is not currently practicable to
estimate the impact of adopting these Statements on the Company's consolidated
financial
19
statements, including whether any transitional impairment losses will be
required to be recognized. If such losses are required to be recognized upon the
initial application of these Statements, they would be accounted for as the
cumulative effect of a change in accounting principle.
In August 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations. This standard requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. This standard is
effective for fiscal years beginning after June 15, 2002, with earlier
application encouraged. Management does not believe the initial application of
Statement 143 will have a significant impact on the Company's consolidated
financial statements.
In October 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which replaces FASB Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. The accounting model for long-lived assets to be
disposed of by sale applies to all long-lived assets, including discontinued
operations, and replaces the provisions of APB Opinion No. 30, Reporting Results
of Operations-Reporting the Effects of Disposal of a Segment of a Business, for
the disposal of segments of a business. Statement 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that have not yet
occurred. Statement 144 also broadens the reporting of discontinued operations
to include all components of an entity with operations that can be distinguished
from the rest of the entity and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. The provisions of Statement
144 are effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, are to be applied prospectively.
Management does not believe the initial application of Statement 144 will have a
significant impact on the Company's consolidated financial statements.
20
LIQUIDITY AND CAPITAL RESOURCES
Our working capital at September 30, 2001 totaled $55.2 million compared
to $72.0 million at December 31, 2000. At September 30, 2001, we did not have
any outstanding borrowings under our $45.0 million revolving credit facility and
unused availability was approximately $33.2 million under the credit facility.
Cash Flows from Operating Activities. Net cash provided by operating
activities for the first nine months of 2001 was $41.4 million, compared with
net cash used in operating activities of $67.2 million in the first nine months
of 2000. The difference between our net income in the first nine months of 2001
of $12.2 million and our $41.4 million operating cash flow was primarily
attributable to a $17.8 million decrease in trade receivables, a reduction in
inventories of $12.0 million, $4.7 million of depreciation and amortization
expense, a $4.2 million provision for excess and obsolete inventories, a $2.2
million increase in accrued interest on convertible debt, and an impairment
charge of $1.2 million, partially offset by a reduction of $12.3 million in
accounts payable.
Days sales outstanding (based on annualized net sales for the quarter and
net trade receivables outstanding at the end of the quarter) decreased to 26
days for the third quarter of 2001, compared to 31 days for the third quarter of
2000. Days sales outstanding for the third quarter of 2001 were affected
favorably by a new financing program for a substantial portion of our
receivables whereby the receivables are generally collected in 10 days in
exchange for a discount of 0.5%.
Inventories decreased 19.6% to $66.1 million at September 30, 2001,
compared to $82.2 million at December 31, 2000. For the third quarter of 2001,
inventory turns (i.e., annualized net sales divided by period end inventory)
amounted to 5.1 times per year. This compares to 3.9 times for the third quarter
of 2000. During 2000, one of our biggest challenges involved financing the
higher levels of inventories required to support increased sales at our Phoenix
facility. During the last nine months of 1999 and much of 2000, these
difficulties worsened because of industry-wide shortages of components that
ultimately delayed shipment of finished goods to customers. By the fourth
quarter of 2000, the component shortages had diminished and we had generally
improved our inventory management practices, which contributed to improved
inventory turns in 2001 compared to 2000.
Cash Flows from Investing Activities. Net cash used in investing
activities in the first nine months of 2001 was $4.8 million compared with net
cash provided by investing activities of $7.3 million in the first nine months
of 2000. Our investing cash flows in the first nine months of 2001 reflect $6.3
million in capital expenditures (including leasehold improvements of $1.6
million at our new Northeast facility, $1.2 million for information technology
assets, and $1.1 million for new manufacturing equipment), partially offset by
$1.5 million of proceeds from the sale of assets. The proceeds from asset sales
consisted primarily of $0.6 million received as a final settlement under the
earn-out provision from the September 1999 sale of our Services Division, and
the release of $0.5 million of proceeds from the February 2000 sale of Tucson
assets that were required to be released from escrow one year after closing.
During the first nine months of 2001, we entered into a 10-year operating
lease that provides for annual payments of approximately $0.6 million for a new
manufacturing facility in Lawrence, Massachusetts. This facility opened in
October 2001 and replaces our facility in
21
Wilmington, Massachusetts that provided for annual lease payments of
approximately $0.7 million.
Cash Flows from Financing Activities. Net cash used in financing
activities in the first nine months of 2001 was $36.6 million, compared with net
cash provided by financing activities of $59.3 million in the first nine months
of 2000. Our financing cash flows in the first nine months of 2001 reflect a net
reduction in borrowings under our revolving line of credit of $28.6 million, the
repayment of a $3.0 million loan from a director, and a $5.3 million reduction
in outstanding checks in excess of cash balances.
We believe we have adequate capital resources to fund working capital and
other cash requirements for the next 12 months. At September 30, 2001, we had
unused availability of approximately $33.2 million under our revolving credit
facility.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Report constitute "forward-looking statements"
within the meaning of the federal securities laws. Additional written or oral
forward-looking statements may be made by us from time to time, in press
releases, annual or quarterly reports to shareholders, filings with the
Securities and Exchange Commission, presentations or otherwise. Such
forward-looking statements may include, among other things, statements
concerning our plans, objectives and future economic prospects, prospects for
achieving cost savings, future capacity utilization, future sales, profitability
and capital expenditures, our proposed merger with K*TEC Electronics Holding
Corporation, and other statements of expectations, beliefs, future plans and
strategies, anticipated events or trends and similar expressions concerning
matters that are not historical facts.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Important factors that could cause such differences
include, but are not limited to, the recent declining sales trend; the
dependence on Honeywell; general economic conditions and specific conditions in
the markets EFTC addresses, including the recent significant economic slowdown
in the technology sector and the recent terrorist activities and resulting
military and other action and their impact on the aerospace segment of the
electronics industry; the impact of the proposed business combination with
K*TEC; integration of management, information, operating and financial systems;
control by our majority shareholder; new management team; diversion of
management attention; and other factors detailed in our filings with the
Securities and Exchange Commission, including our Annual Report on Form 10-K for
the year ended December 31, 2000 and our preliminary proxy statement included in
the Registration Statement on Form S-4 filed by Suntek on November 8, 2001.
Readers are cautioned not to place undue reliance on any forward-looking
statements contained herein, which speak only as of the date hereof. These
statements reflect our current expectations, and we do not undertake to update
or revise these forward-looking statements, even if experience or future changes
make it clear that any projected results expressed or implied in this or other
company statements will not be realized.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On March 30, 2000, we entered into a $45 million revolving line of credit
agreement with Bank of America, N.A. The interest rate under this agreement is
based either on the prime rate or LIBOR rate, plus applicable margins.
Therefore, as interest rates fluctuate, we may experience changes in interest
expense that will impact our financial results. We have not entered into any
interest rate swap agreements, or similar instruments, to protect against the
risk of interest rate fluctuations. Assuming outstanding borrowings of $45
million, if interest rates were to increase or decrease by 1%, the result would
be an increase or decrease in our annual interest expense of $450,000.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
Not Applicable.
(b) REPORTS ON FORM 8-K:
Not Applicable.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EFTC CORPORATION
-------------------------------------
(Registrant)
Date: November 14, 2001 /s/ James K. Bass
-------------------------------------
James K. Bass
Chief Executive Officer
Date: November 14, 2001 /s/ Peter W. Harper
-------------------------------------
Peter W. Harper
Chief Financial Officer
Date: November 14, 2001 /s/ James A. Doran
-------------------------------------
James A. Doran
Chief Accounting Officer
24